Build the Ultimate Passive Income Portfolio With Just $5,000

Ever daydreamed about making your money work for you while you kick back on a beach? Well, there’s a dynamic duo in the financial world that might just be your ticket to those dreams: the Tax-Free Savings Account (TFSA) and covered call exchange traded funds (ETFs).

With the sweet tax perks of a TFSA and income magic of covered call ETFs, even a modest $5,000 can get you off to a solid start. In this piece, we’ll break down how this can work for your five grand and – just for fun – peek at what happens if you up the ante.

Why Is a TFSA?

The clue’s in the name, folks. Any income, dividends, or capital gains you earn within your TFSA – yep, it’s tax-free. That means your investments can grow unhindered by the taxman’s grasp.

Unlike some other accounts (looking at your RRSP), there’s also no age limit at which you’re forced to withdraw or convert your TFSA. It’s yours to use, as you like, for as long as you like.

You also get some great flexibility. Life happens. Unexpected expenses pop up. If you need to dip into your TFSA funds, you can do so without any penalties. And here’s the cherry on top: the amount you withdraw is added back to your contribution room the following year.

For this year, you’ve got a shiny $6,500 to contribute. While that might not sound like a king’s ransom, remember: It’s not just about the amount you’re throwing in—it’s about the tax-free growth potential of those dollars over time.

Why a covered call ETF?

So, you’ve got the lowdown on TFSAs. Now, let’s dive into the other half of our dynamic duo: the covered call ETF. Here’s the deal: these ETFs sell call options on the stocks they hold. In simpler terms? They’re trading the potential future growth of a stock for immediate cash.

By converting future potential into present profit, covered call ETFs often produce yields that can downright dwarf those of dividend stocks. Another alluring aspect of covered call ETFs is their ability to deliver a consistent monthly paycheque, unlike quarterly dividend stocks.

A quick heads up, though: If you’re looking for an investment that’ll skyrocket in value over time, this might not be it. But that’s okay! The name of the game here is steady, reliable income. And in that arena, covered call ETFs are hard to beat.

Now, diving into options trading on your own is complex and not for the faint of heart. But here’s the beauty of covered call ETFs: you’re letting seasoned professionals handle the options trading, so you can kick back, relax, and watch the income roll in.

Investing $5,000 for passive income

Consider BMO Covered Call Canadian Banks ETF (TSX:ZWB), which holds all six big Canadian banks and sells call options on them.

Right now, this ETF is paying out an annualized distribution yield of 7.24%. For a $5,000 investment, you can expect the following level of income:

That being said, nobody is going to retire off $34.32 a month. It takes money to make money after all! By upping your investment beyond $5,000, you can dramatically increase your monthly income potential. Here’s what the yield on a $50,000 investment in ZWB would look like (but make sure such a move is compatible with your risk tolerance first – ZWB is not a risk-free investment!)